Gareth Cosslett explains how Tesco.com is battling to be your first
port of call when you want to fill up your e-trolley
John Browett could be ranked alongside the giant panda or the
black rhino as an endangered species. He is a member of one of the
tiniest sub-sects of the e-commerce world: the rare genus known as
e-profit makers.
And the former Cambridge zoology student has as good a case as
any to be billed as the king of the jungle. As chief executive of
Tesco.com, he is heading up one of Europe's
largest online retailers and the biggest e-grocer in the world.
Just 18 months after a full roll-out into 240 Tesco stores in
the UK, the grocery business is already making a profit. No
embarrassed finger-jabbing at sales projections, no demographic
justification for current loss-making strategies, Tesco's Internet
shopping and home delivery service is already in the black on the
grocery side.
The constant addition of new product categories such as
electrical goods, financial services, mother and baby goods,
clothes and home entertainment - plus the losses from the mail
order business and overseas expansion - mean that the overall
Tesco.com business is still making a loss. But Browett says it is
just a matter of time before his business produces positive
returns.
"The reason we report losses is that we put in all the start-up
losses for all the other e-commerce initiatives that we have. But
the grocery business is profitable. It is not the same as store
profitability, but it has only been fully going for 18 months. Our
objective for that business - and we expect to achieve it fairly
straightforwardly - is to have profit margins that are the same as,
if not higher than, the stores," he says.
The relationship with stores has always been a thorny one for
online food retailers. The fear that e-commerce will cannibalise
sales from bricks-and-mortar outlets has held back development for
many retailers. Tesco took a gamble in launching into e-commerce
and, Browett says, it paid off.
"Half our sales on the Internet are new to Tesco, so half are
cannibalised. That is a really exceptional performance. It means
that I can build a new business while keeping existing customers
happy.
"We always knew that this was a device to increase market share.
It is a new service, it adds value to customers and enables us to
access customers we could not otherwise get to. We think there is a
very big advantage to being first in this."
The size of his business and its rate of growth is sending shock
waves through Tesco's traditional competitors such as Sainsbury's,
Safeway and Asda, which have all proved reluctant to roll out a
full service before working out how to turn a profit.
Tesco's online service is handling 60,000 orders per week,
producing a turnover of more than £5m per week in groceries alone,
and has 750,000 registered users in the UK. The grocery service
covers 90% of the UK population and the average spend per order is
£85. The business has doubled in size in the last six months and
Browett is confident that the Tesco.com steamroller will power
forward.
"We have capacity within our system to do up to £2bn worth of
turnover. That is based on the capacity within our stores and what
we currently know, but there is no reason why it should not go
beyond that.
"It has surprised everybody that there is £250m worth of
business to be done in grocery home shopping. If it doubled every
year for the next five years then we could handle it, but faster
growth than that would be difficult."
There is also huge scope for overseas development. In markets
where Tesco already has stores, the UK business model is being
adopted: Tesco.com launched in Ireland last month and is hitting
South Korea next year, with Taiwan also pencilled in for the
future.
In countries where it has no presence, Tesco is looking to set
up joint ventures with other retailers to combine their store
portfolio with Tesco's e-commerce business model. Its first
priority market is an audacious coals-to-Newcastle play: "We're
focusing on North America at the moment. We're going through the
list and have got some promising leads," says Browett.
His level-headed approach is the result of a textbook business
upbringing: Cambridge student; five years cutting his teeth in the
City; excelled at the best MBA in the US; think-tank role at the
Boston Consulting Group; groomed for the top at Tesco - arguably
the UK's best-run company in arguably the UK's most cut-throat
business environment.
Here is a man not adverse to dipping into a business manual or
two.
"In our business model we have created a classic 'strategy
versus tactics' environment. We set a strategy for our development
team and all they do is think about how to actually make the
business better, simpler and cheaper.
"Tesco.com has its own board and is run as a separate business,
but it obviously taps into the advantages that the mainstream Tesco
business has, such as the power of the brand, the chance to use our
stores to promote the service - half of all UK households come
through our doors every 12 weeks - and the buying power and
contacts that Tesco has.
"We are running a real business, so our day-to-day problems are
in managing the cost lines properly and improving the quality of
the service. We worked on the economic model for three years before
we launched in December 1996. We were not ready for a full roll-out
until 1999, so it has taken us a long time to work out how to make
it robust and profitable."
Browett is proud of the fact that existing Tesco staff have
largely been behind its success - a team of just six people was
working on the project when the first Internet order was taken four
years ago. A total of 70 people now work on the business.
"We have developed a lot of people internally. We have not spent
a lot of time going out into the market to get whizzkids. The
reason for that is two-fold. One is that the Tesco people are good
and they know the business well. The other is that it is not
actually that complicated when you get down to the
fundamentals.
"The mistake that lots of people make with Internet businesses
is that they say they are IT businesses when in fact they are not.
A lot of the Internet start-ups have failed because they were not
run by people who actually knew what the underlying business
process was going to look like. The IT is only a facilitator; it is
not an end in itself.
"The way we do our IT is we have a core group of people who work
on key projects, but we then outsource quite a lot of tasks such as
code writing to contractors, consultants and even the Tesco IT
department. When you are developing the business, you need
different skills at different times. There is no way we could go
out and hire a snapshot of all the people we need because we know
it will change in six months' time. We need to think fast on our
feet."
He says that most of the £35m capital expenditure being invested
in Tesco.com last year is into IT - particularly into the fully
automated in-store picking system which features a PC on each
trolley that tells the pickers where to go next after scanning each
item.
Browett says Tesco.com's success has been built on getting the
basics right. This pragmatic capitalist is scathing about some of
the hot air talked in the dotcom arena, but argues that the
bursting of the e-bubble will not affect "well-rooted" businesses
such as his own.
"All that has happened with pure plays is that the fundamentals
of business have come back into practice. I think that is healthy
for the market because there were too many people running around
with business plans which were unachievable and were not going to
deliver value to the customers. They were reliant on putting prices
up over time rather than working out what the business model is
today.
"It's better to have well-executed, well-run businesses that are
making money on the Internet rather than people who are not giving
value to customers and not going to achieve their long-term
promises."
He lists e-Bay, Dell and Charles Schwab as the e-commerce
operations that he most admires. "They have created completely new
business models, they have fashioned a successful business out of
something that just wasn't there before. But I would argue that
what we have done with grocery home shopping is as big a change to
the market as what Dell did with its straight-through delivery.
Both have fundamentally changed the competitive structures of their
industry."
As for his competitors in grocery home shopping, Browett says,
"We do not fear anybody. Nobody seems to have hit on an economic
model that actually works - you can tell that by the fact that
their sales are not closing up on us. But we don't take our lead
for granted. Tesco has traditionally been paranoid number two and
that is how it became number one. That is how it will stay number
one - you cannot rest on your laurels."
Curriculum vitae: John Browett
John Browett, 36, joined Tesco in 1998 as business development
director. After steering Tesco's corporate and strategic
development - including mergers and acquisitions, new category
development and profit improvements - he moved over to his current
role as the head of Tesco's consumer Internet business and home
shopping service in April last year.
Before that, he worked for five years at the Boston Consulting
Group, which he joined after winning the Palmer Scholarship as an
MBA graduate at the Wharton Business School. Originally a zoology
undergraduate at Magdalene College, Cambridge, he has also worked
for five years at Kleinwort Benson, making investments for a
mezzanine fund in buyouts and other venture capital opportunities.
Married with a young family, he lives in Highgate and lists dinghy
sailing as an interest.
Battling through the technology constraints
Tesco is striving to make the online shopping experience a more
enjoyable, efficient experience. One recent innovation is the
introduction of Express Shopper, a new facility which allows
shoppers to type in their shopping list, click a 'go shopping'
button and then be transported to the aisles where items are stored
so they do not have to search.
John Browett believes that faster, further-reaching Internet
technology will revolutionise e-commerce and the potential for
retailers to reach customers. "Broadband will make a dramatic
impact on the Internet and its usability. Always-on is also going
to significantly improve uptake," he says.
"We all know the Internet experience can be frustrating. But the
question is about time - will the new technology take 10 years or
three years to reach the mass market?"
He concedes he must work within the constraints of the system
for the time being but, once the public does have access to the
technology, he fully intends to exploit it. "We will be able to
improve the customer offer by streaming videos directly through to
people. We will be able to do things on the Web site that are not
possible at the moment - the design and usability and product shots
are obvious areas."
But he is cautious of investing too heavily in technology
supporting platforms such as digital television and Wap-enabled
mobile phones. "Digital TV and m-commerce are more appropriate for
non-food than food shopping. The problem with the new platforms is
that the platform owners want to get a very high percentages of
sales. Platform owners are looking at i-mode in Japan and seeing
that they are getting 9%, so they say they will get 8%.
"This percentage out of any retail business is very high - the
only retail businesses that can afford it are the high-margin ones
such as luxury goods and clothing. No one else has the margins. So
they are cutting off the options for any major discount operation
to work on those.
"In digital television, no-one has explained to me how the
customer offer can be made attractive for retailing. Take the
'normal household' - what is the rest of the family going to watch
when one individual is doing the shopping? It is lean back, not
lean forward, and is hard to present the data in the right format.
The modems on digital TV, frankly, are not fast enough. It will be
a while before we see it having a major impact on a data-intensive
process like grocery shopping."